Markets & Finance

S&P Boosts Continental, US Airways, Cuts JP Morgan

September 24, 2006

From Standard & Poor's Equity Research

US Airways Group (LCC)

Continental Airlines (CAL)

Upgrades each to 5 STARS (strong buy) from 3 STARS (hold)

Analyst: James Corridore

Our upgrades reflects the large drop in oil prices. For US Airways, we have also factored in our view that the company should continue to generate unit revenue growth in excess of the industry average due to continued rationalization of its combined America West-U.S. Airways route network. Also, we think the company is likely to continue to meets its cost cutting goal while integrating the two airlines. We are raising our 2007 EPS estimate to $7.50 from $7.00, and our 12-month target price to $68 from $66, 9 times our 2007 EPS estimate, below peers due to integration risks associated with the merger.

Looking at Continental, our upgrade also reflects our belief that investor worries about the impact of terror risks on air travel demand have been overblown. We think that air travel demand is likely to remain strong through 2007, and believe Continental has opportunities to raise yields in that environment. We are raising our 2006 and 2007 EPS estimates to $3.00 and $4.50, from $2.90 and $4.00. We are raising our 12-month target price

to $50, from $30, 11 times our 2007 EPS estimate, in the middle of the company's historical p-e range in past periods of profitability.

JPMorgan Chase (JPM)

Cuts to 3 STARS (hold) from 4 STARS (buy)

Analyst: Mark Hebeka, CFA

Shares are up approximately 20% year-to-date and approaching our 12-month target price of $49. We continue to view JPMorgan as a diverse player and see it as having positive momentum coupled with strong growth prospects, but believe the shares are fairly valued given a challenging interest rate environment and the potential for volatility in its capital market related businesses. Additionally, while we continue to view favorably its upcoming asset swap with the Bank of New York (BK), pending approvals, we note increased integration risk.

Guangshen Railway (GSH)

Ups to 3 STARS (hold) from 1 STAR (strong sell)

Analyst: B.Chan and K.Kirkeby, CFA

Recent reopening of the IPO market in China increases likelihood that Guangshen Railway can complete a Shanghai A-share listing and, thereby, advance with its pending Guangzhou-Pingshi Railway purchase, in our view. We are raising our 2006 and 2007 earnings per ADS estimates $0.03 each to $1.00 and $1.04, on higher-than-expected long-distance train revenue following capacity additions in the second quarter of 2006 and a change in forex. With what we see as improved potential for the acquisition to proceed this year, our 12-month target price is increased to $21 from $15.

Hewlett-Packard (HPQ)

Reiterates 3 STARS (hold)

Analyst: Richard Stice, CFA and Clyde Montevirgen

Given recent issues related to corporate leaks and a subsequent investigation, HP conducted a press briefing after Friday's close. CEO Mark Hurd has been appointed Chairman, replacing Patricia Dunn, who planned to step down as Chairman in Jan. 2007. Hurd indicated he was aware of some of the probe's questionable activities, but did not have extensive knowledge about them. We believe that while this could absolve Hurd of at least some culpability, it is worrisome that he received a probe summary in Mar. 2006 and did not read it. We have concerns about HP's corporate governance.

Sony Corp. (SNE)

Maintains 2 STARS (sell)

Analyst: John Yang

We think Sony's decision to cut its PS3 selling price 20% could spur further losses in its games unit. With the PS3's new price projected to raise the gap between the current cost and revenue by 10% to $472 million from $429 million in fiscal 2007 (March), we see potentially wider fiscal 2007 losses from games than initially expected. Our fiscal 2007 earnings per ADR estimate falls 2 cents to 65 cents, but our projection for fiscal 2008 remains 64 cents. Our target price is $38, based on blended historical price-to-book value and p-e of 1.7 times and 44 times, respectively. We view the current p-e of 63 times as pricey, versus TOPIX Electric Appliance average of 40 times.